Question

Refer to the article: "Soda stream: How to tax sugary drinks." The Economist, May 23rd, 2019 American households earning less than $10,000 a year buy twice as much sugary drink as those earning $100,000. Therefore, if demand for sugary drink is price-inelastic, and a sugar tax is applied, who would pay the bigger portion of the tax? A. The poor

B. The rich

C. None pays the tax, as they stop buying sugar drinks

D. The poor and the rich pay the tax equally

Answer 1

Since the demand for sugary drink is price inelastic, first of all the consumers would pay the bigger portion of the tax. Now within consumers there are two categories one who earn less than 10000 dollars and the other category earning $100,000. The first category buys twice as much sugary drink as compared to the second category. Since, the budget of the the first kind of consumers is low and they consume more sugar drink ok as compared to the second category, the expenditure on the sugary drinks constitute a large portion of the budget of the first category of consumers than second category of the consumers. Therefore we can say that the demand for the first kind of consumers is more elastic than the second kind of consumers. And more elastic the demand the less portion of the tax a particular kind of consumers bear. So ademand of the the first kind of consumers(poor) is more elastic than the second kind of consumers it means that they will have to pay a lesser amount of tax than second category of consumers(rich).

Hence, the rich would pay the bigger portion of the tax.

Therefore, option B is correct.